Educational Articles

This Stock Still Has Room to Run!

Dominic B. Silva
| February 01, 2011

Steve Ells opened the first Chipotle Mexican Grill (CMG) restaurant in Denver, Colorado in 1993. Two more properties quickly followed in the state, before the operator expanded into the Midwest. Chipotle’s sudden success drew the attention of fast-food heavyweight McDonald’s Corp. (MCD - Free McDonald's Stock Report), which made a series of investments in the chain between 1998 and 2001. That infusion of capital allowed the company to grow from 16 restaurants in 1998 to roughly 500 by 2005. Encouraged by its operating performance and Wall Street’s clamor, Chipotle held its IPO in 2006, debuting at a healthy $22 a share. Investor appetite for the burrito chain was overwhelming, and the value of Chipotle’s shares doubled during the first day of trading. Since then, the market value of the enterprise has increased considerably. The stock slipped briefly in 2008, primarily as a result of the recession and concerns about the outlook for the fast food industry. The issue has since resumed its upward climb.

The fact that Chipotle performed well in spite of uncertain macro-economic conditions speaks volumes about the concept’s ability to attract new customers and retain old ones. Chipotle achieved this by appealing to a wide swath of consumers. The company’s “Food With Integrity” program, has a policy of selling mostly naturally raised meats (animals that have not been given growth hormones or animal by-products), as well as organically sourced produce and dairy products. This has resonated in the market, as consumers have become more health conscious. Too, the company primarily caters to college-educated, middle-class customers. This demographic category was among the least affected by the recent recession, and one where unemployment levels remain relatively low. Lastly, foot traffic was boosted by an influx of affluent customers opting for this less expensive, yet premium, dining alternative. These factors have enabled the company to report industry-leading same-store sales in recent years.

After reporting wide share-earnings gains every year since it went public, the company is positioned to continue reporting good results. Indeed, Chipotle’s ongoing domestic and international expansion program (highlighted by the development of the “A’’ type restaurants, discussed below), efforts to introduce a kids menu, and the impending launch of an Asian-concept chain suggest that this stock has ample room rise further.

Management intends to open 135-145 new restaurants in 2011 (a 12%-13% increase) with plans to grow at a double-digit pace for the foreseeable future. The fact that most of the company’s U.S. markets, particularly along the East Coast, remain under-served augurs well for operations. We are even more encouraged by Chipotle’s international expansion, which started in London during 2010. Moreover, that successful launch has emboldened the chain to contemplate sites in Germany and France, with the goal to set-up shop in Paris during 2011. Moreover, consumers in European markets have a greater appreciation for healthy food, another positive sign.

A key contributor to operations of late has been the successful debut of “A’’ model restaurants, which are smaller, simpler and cheaper to establish and operate. Between 25%-30% of the total number of sites slated to open in 2011 are “A’’ model concept. These restaurants are located in well-established markets with high levels of brand awareness. Moreover, while such properties are constructed at substantially lower investment costs than traditional sites, many are generating sales comparable to bigger locations. At these properties, Chipotle is investing in a host of new design features that should substantially curtail energy needs. Assuming management can maintain momentum at the burrito chain’s “A’’ model concept, operations should experience enhanced operating efficiency in the years ahead.

After a promising test run in Denver, Chipotle is rolling out a kids menu in other select markets. The initiative’s potential is highlighted by recent trends that indicate more families are visiting Chipotle sites. Indeed, with childhood obesity on the rise and nutrition taking on greater importance, Chipotle’s relatively healthier fare may present a more reasonable option for some families, than traditional burger and fries establishments. While management has not disclosed specific plans, a national rollout with collectible toys similar to McDonalds’ may be in the works.

Not content with the mastery achieved with the Mexican concept, Mr. Ells has set his sights on expanding the “food with integrity” concept. In particular, the company announced a yet-to-be named Asian concept, with the first property scheduled to open in 2011. Though in the early development stages, management is optimistic that it can achieve success by serving healthy food.

While Chipotle has been a success, the company’s numerous growth vehicles have the potential to propel the stock even further in the years ahead.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.